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Mortgage Rates Tumble

A tepid Employment Report for August paired with additional weak economic data and rising energy prices sent U.S. Treasury securities prices soaring. Yields, which move in the opposite direction of prices, fell to their lowest levels in two months. For the past several weeks bond traders have viewed soaring energy costs as a deterrent to economic growth that would eventually take Fed rate hikes out of the picture. In the wake of the economic impact of Hurricane Katrina, fed futures are now erasing prospects for rate hikes in November and December, and chances for a September increase are waning. This is good news for Treasuries and good news for mortgage rates, which are based on Treasury yields. Over the past week rates have fallen on most products.

Expectations that high energy prices will cut into consumer spending spurred buying in Treasuries, which also got a lift from declines in manufacturing and a slight dip in Gross Domestic Product. Second-quarter GDP eased to 3.3 percent from the previous 3.4 percent. The Chicago Purchasing Managers Institute index on August business conditions plunged below 50 to 49.2, indicating contraction in the sector. The ISM index on manufacturing conditions also eased in August, coming in at 53.6 from 56.6.

On the labor front, 169.000 jobs were added to non-farm payrolls in August -- 21,000 short of expectations. And wages increased by a benign 0.1 percent to $16.16 an hour. The unemployment rate fell to 4.9 percent, the lowest level since Sept. 2001. Consumer Confidence for August rose to 105.6, with plentiful jobs cited as the reason for optimism. Consumer Spending in July also rose a full 1.0 percent, while savings plunged to negative 0.6 percent. Auto purchases at 'employee prices' accounted for a good part of that spending. New construction remained flat in July, and was downwardly revised in June to minus 0.6 percent from minus 0.3 percent.

Mortgage applications fell for the week ended August 26, according to the Mortgage Bankers Association. Applications to purchase were down 3.6 percent, while refis were off by 5.4 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) is just above 5. 5 percent, while the 15-year fixed-rate is slightly below 5.125 percent. The introductory rate on the volatile one-year ARM rose to 4.125 percent.

The first week of September - shortened to four days due to Labor Day - is lean on data. Major reports include only the ISM index on the service sector for August, second-quarter Productivity and Costs, U.S. import/export price indexes and the release of the Fed's Beige Book, which looks at nationwide economic conditions. News from the hurricane-devastated areas and energy prices will likely guide Treasuries. If safe-haven buying continues, mortgage rates should remain at lower levels.

Carolyn Siegel

carolyn@interest.com